The International Financial Reporting Standards are the
focus of three recent articles:

1.This review which links you to major reports on
the standards and other articles and discussions on implementing the
standards—we do what can only be done on a computer: give you the chance to
browse and decide for yourself by consulting many e-documents.

"How does a
patch of ground get the okay from the money people to become a mine? Given that
the patch of ground is going to take about 10 years before something saleable
comes out of it, there are many assumptions that will have to be made, such as
the future value of the metal, the cost of production and the cost of cleaning
up once all the metal is gone. How do you put a money figure on all
these future factors and make the results comparable so you can meet
industry standards and make your project comparable with all the other
potential investment opportunities out there?”

This the question
asked by my Peer
Reviewer.So I pose the question,
and now I proceed to answer it in my dry way.

The International
Financial Reporting Standards are intended to increase the transparency and
comparability of financial statements.Thus they are particularly applicable to a mining company’s financial
statements and aspects of mining accounting such as derivatives, interest
rates, and currency swaps.I will
attempt to explain all this as we proceed.

Common mining related derivatives are long-term commodity
sales contracts and long-term contracts to purchase electricity or fuel.In short, how do you put a value on these
when the “value”, cost, or income is not absolutely determined, and no current
income or expenditure is involved?

Contracts indexed to market-based variables may contain an
“embedded derivative”.For example if
the contract price or income is linked to consumer price of labor indexes,
foreign exchange rates, or the price of coal or electricity, it may be
difficult to establish just what the value of the contract is.This is not just of interest to the
accountant.It may affect the underling
value of the company, the mine, or a department’s budget provisions—and thus
the poor engineer is involved and affected.

A mining contract based on a derivative is to be valued in
accordance with the International Financial Reporting Standards at fair
value.Can you imagine setting that
number as you fight for next years budget increase or try to justify your
consultant’s latest estimate of closure costs for a newly planned tailings
impoundment.

Here are some key points from the PriceWaterHouse report:

1)Mining activities begin with the exploration and
evaluation of an area of interest.If
the exploration and evaluation are successful, a mine can be developed and
commercial mining begin.Many years and
significant costs precede mining.Many
exploration projects do not result in a mine.Some mining companies capitalize exploration and evaluation expenditure;
others write off the costs preceding a decision to start production.Another approach is to “provide in full
against exploration costs”; if the project is abandoned, the costs are written
off; if the project proceeds the provision is reversed.

2)The commissioning period may be long.During commissioning of the mine production
gradually increases to design capacity.For example, commissioning a block caving operation may involve
increasing production as the cave goes higher.Which costs are capital costs, involved in “establishing” a mine, and
which costs are “production” costs in the traditional sense of the word?Defining all costs and revenues as operating
may result in a large reported trading loss on expenditures that in reality
will produce substantial future income.

3)Mines may be tempted to recognize
decommissioning liabilities when the mine starts commercial production.In practice, the liability arises at the
development stage—you will have to decommission even though no product has yet
been produced.

I will not attempt to summarize the rest of the discussion
on the accounting complexity of decommissioning costs.We can all quote cases were the cost
estimates and provisions vary wildly from time to time as mine plans change, as
regulations change, and as expectations change.Inevitably thought the engineer is affected by the accounting procedures
implemented to provide for these costs.Here is a case history from the PricewaterhouseCoopers report:

“An obligation to incur
decommissioning and site rehabilitation costs occurs when environmental
disturbance is caused by development or ongoing production.Costs are estimated on the basis of a formal
closure plan and are subject to peer review.The cost for restoration of site damage is provided for at net present
values and charged against operating profits as extraction progresses.Changes in the measurement of liability
related to site damage created during production is charged against operating
profit.

Other mining activities where the accounting gets complex
and may affect real-time technical
decisions are:the decision to strip
overburden now or defer it until later; when and what to stockpile; and of
course when to actually do rehabilitation work, now or later.

The PricewaterhouseCoopers report notes that accounting
procedures in these and many others areas of mining are developing and
changing.They encourage individual and
industry groups to actively participate in interpreting and applying the
standards.

The PriceWaterHouse report is beautifully produced—as are
all the reports on this topic—a measure of the cost of accounting?Unfortunately the writing is not.The issues are not that hard—see the KPMG
report:a model of clear prose is this statement: